vinati organics impetus advisors jul09

8/9/2019 Vinati Organics Impetus Advisors Jul09

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Equity Research |Vinati Organics | 14 Jul 09

Impetus Advisors |Independent Investment Research | Equities Forex CommoditiesP a g e | 2

Key Products

Isobutyl Benzene (IBB) 2 Acrylamido 2 Methylpropane Sulfonic Acid & its sodium salt (ATBS & Na-ATBS)

Isobutyl Benzene (IBB)IBB is key ingredient of Ibuprofen, an anti-inflammatory analgesic bulk drug. Its also used

in perfumes and as a specialty solvent. Vinati Organics is global market leader in IBB with

over 60% global market-share. Its IBB production capacity is 14000 TPA and FY09

production was around 11,500 ton. IBB global market is growing at around 5% annually, as

Ibuprofen is at a mature stage of product lifecycle. However, the company has been

growing at a little faster rate due to gain in market share. It is expected to gain further

market share this year, as production in China is going down (China IBB capacity is less

than 2000 TPA). The companys competitive and significantly low cost of manufacturing and

scale economies are the key success factors here. It supplies directly to ibuprofen

manufacturers. India is a net exporter of Ibuprofen. BASF is the largest manufacturer of

Ibuprofen in the world. Biocause (China) and Shasun Chemicals (India) are amongst the

largest ibuprofen manufacturers. SI group Inc (Schenectady International) is the 2nd largest

producer of IBB globally. In India, SI group has capacity of 3-4000 TPA.

ATBSATBS find applications in a wide range of areas including water treatment, oil

recovery/drilling, mining, construction chemicals, personal care products etc. ATBS globaldemand continues to be strong. ATBS, Na-ATBS and other derivatives that the company

makes are monomers and are supplied to polymer manufacturers who then sell the

polymers to users through their distribution channels. Direct sales are only to acrylic fiber

industry. Applications like Enhanced Oil Recovery & Water Treatment hold substantial

potential for growth of ATBS. ATBS technology was developed by Pune-based National

Chemicals Laboratory and was exclusively licensed to the company. The company has 15-

20% global market share in ATBS. There are only three other manufacturers of ATBS

globally viz. Lubrizol-USA, Toyo GOSEI-Japan and a small Chinese company with less than

1000 TPA capacity. It is very difficult to get the right technology to make ATBS. Withlimited number of suppliers, customers are keen to support a new supply source. Vinati

Organics has been able to improvise the technology and customize the products to suit

varying applications. ATBS sales normally take place through long term or annual contracts.

Vinati Organics has a few long term contracts with provisions to fully pass on changes in

input costs and partly pass on currency fluctuations.


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Investment Arguments

Oligopolistic position in both the products

Vinati Organics global oligopolistic position in both of its key products positions it on a verystrong footing. Cost leadership & scale economies in IBB and technological entry barrier in

ATBS are great strategic advantages. Going forward, the company wants to get into only

niche products that offer technological edge or cost competitiveness and this augurs well for

its continued strategic edge.

ATBS capacity doubled effective May-09: Growth driver for FY10 & FY11ATBS (including Na-ATBS) capacity was modernized and expanded at the cost of Rs.40

crores from 5000 TPA to 10,000 TPA. The expanded capacity is available effective 16th May

2009. The company has a long term (2-3 years) supply agreement for 5000 TPA. The high

margin high growth products contribution to sales is likely to go up from 43% in FY09 to

50% in FY10.

Backward integration into Isobutylene (IB), a key input for ATBS: Growth

driver for FY11The company is currently in the process of setting up backward integration project for

making Isobutylene (IB), which is a key input in the making of ATBS. Currently IB is

imported from Europe & Taiwan in pressurized tanks. The project will cost Rs.40 crores and

save significantly in logistics costs. The project is expected is commence towards the end of

FY10 and hence will contribute to growth in FY11. At present, there is only one

manufacturer of IB in India with 6000 TPA capacity. India imported about 6000 ton of IB

last year. Of the 8000+ TPA capacity being set up, about 4000 ton will be captive

consumption and balance will be for sale to manufacturers of agro-chemicals, anti-oxidants,

etc.

A new breakthrough product may drive growth beyond FY11For growth beyond FY11, the company is currently working on a pilot project for another

technology breakthrough drug intermediate. Like ATBS, technology for this product is also

developed by Pune-based National Chemical Laboratory. We understand that this product

has significantly higher market potential than the companys existing products.


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Risks / Concerns

Capacity expansion in IBB

Large capacity expansion may lead to oversupply in IBB and may impact margins, ascurrently demand-supply is evenly balanced with demand growing at 1000 TPA. IOL

Chemicals & Pharmaceuticals (IOLCP), a large producer of ibuprofen, recently expanded

ibuprofen capacity and is shortly going to commence a 6000 TPA IBB capacity. IOLCP is not

a major customer of Vinati Organics for IBB. However, if IOLCP could gain market share in

ibuprofen with its enhanced capacity (3600 TPA to 6000 TPA), ibuprofen sales of its

competitors could fall leading to lower demand of IBB for other IBB manufacturers. This

may make them lower their prices to keep capacity utilization high. This can lead to margin

compression in IBB.

Delay in launch of the new product for which pilot plant is being set upDelay in launch of the new product, for which a pilot plant is currently being set up, may

lead to lack of growth drivers beyond FY11 unless any other growth driver emerge in the

meanwhile.

Forex fluctuationsAs over 70% of the companys revenues come from exports and even the domestic sales

track import parity price, INR appreciation is a risk. Thought the risk is limited to the

contribution margin, as even locally sourced raw material track import parity price. Even

the contribution margin is not fully exposed as long term contracts have provisions to shareforex risk. In addition, there is forex loan (Rs.36 crores as on 31-03-09) that acts as a

partial hedge. For our current view on INR/USD, please refer www.impetusadvisors.com\research.htm

Teething troubles in scaling up expanded capacity of ATBSATBS capacity was doubled recently in mid May09. As the process is new, there can be

teething troubles. This may lead to lower earnings growth in the interim. There could also

be delay in tying up customers for the enhanced capacity.

Ownership & ManagementAs at the end of Jun-09, the company is 75% owned by promoters (Saraf family led by MD

Vinod Saraf & ED Vinati Saraf). Institutional holding is negligible. The company was formed

in 1989 by Mr. Vinod Saraf, a first-generation entrepreneur jointly with Maharashtra

Petrochemical Corporation Ltd, a government of Maharashtra undertaking.


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Important Disclosure

This material has been prepared by Impetus Advisors, Mumbai, India(www.impetusadvisors.com).

The views expressed herein correctly reflect Impetus Advisors views. Owners, analysts,

and/ or employees of Impetus Advisors hold long position in the stock of Vinati Orgaincs.

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vinati organics impetus advisors jul09

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